The total spent on buybacks for each airline across five years (2016-2020) compared to the 2020 bailout dollar amount the airline received.

In spring 2020, in response to COVID-19’s impact, the airline industry negotiated for $25bn+ in federal bailout funds. To date, Alaska, Delta, Southwest, American, JetBlue, and United have announced plans to receive funds. The bailout funds will be used to keep the approximately 750,000 airline workers employed. A question arose from the bailout announcements: Why weren’t airlines better prepared for Black Swan events? We’ve published the code used to create the charts from this post in our GitHub repository for anyone to access. You can reproduce the work from the research notebook.

News reports contrasted the bailout, which will ultimately be funded by taxpayers, with the billions of dollars airlines spent on share buybacks in the last few years. American, Delta, JetBlue, Southwest, and United all spent more on buybacks in the last five years than they are getting in the 2020 airline bailout. However, the answer to appropriate buyback spending requires less of a look at today’s bailout and more of a look at decisions each airline made about how to spend their cash flow over the last five years.

What we first want to acknowledge is that when a company buys back its own shares, it creates a short-term increase in the company’s stock price. For shareholders and company executives, the benefits of spending on buybacks today often outweigh the benefits of saving cash for a “rainy day.” The shareholder theory that companies are mainly beholden to their investors is heavily debated, but incentives still seem to favor behavior that affirms the theory.

We hold companies responsible for their spending decisions, and so the amount spent on share buybacks across the industry, many argued, was irresponsible. Information quickly circulated about how Alaska, Delta, Southwest, and United spent 96 percent of their free cash flow on share buybacks in the last decade.

Using QuantConnect’s SmartInsider and Morningstar fundamentals data, we explored data related to airline buybacks, free cash flow, operating cash flow, and the bailout to get a sense of what this news soundbite meant for each airline.

The money spent on buybacks is taken out of a company’s cash flow. Operating cash flow (OCF) is used to evaluate cash a business has to spend after operating expenses. Business owners must decide what to do with this cash. Operating cash flow less capital expenditures (CapEx) is free cash flow (FCF). FCF is the portion of cash left that is spent on investment activities for shareholders. Negative free cash flow is a result of investing in CapEx at an excess of OCF, investments that could go into long term assets like plants, property, and equipment. Thus, having a negative FCF itself is not necessarily indicative of irresponsible spending.

A Motley Fool article discusses how American Airlines, not the entire airline industry, should be singled out for poor use of FCF. It also argues that OCF is the entire amount that businesses have to allocate to their business, and so it is more reasonable to look at buybacks as a portion of OCF rather than as a portion of FCF.

Ultimately though, we must acknowledge that money is fungible and the data shows money was spent when there weren’t funds to spend in the first place. When we take a look at the percentage spent on buybacks over the last five years compared to FCF and OCF over the last 5 years for each airline, American Airlines and Allegiant Air stand out with negative buybacks to FCF spend ratios. Despite negative FCF, they chose to still spend what they did not have on share buybacks, and that’s a problem. The buybacks call attention to reform not just for American Airlines, but Allegiant Air as well.

We encourage you to dig into the data for yourself and come to your conclusion on what should be done going forward. With more data, we can better shape our world tomorrow.